When It's Time to Raise Prices for Your Service. . .

I recently received the following question from a reader:

"I have a small consulting business. For the past couple of years, I have charged all my clients $175 an hour for my services. Since almost all my competitors charge rates of between $250 and $300 an hour, I have decided to raise my rate to $225 an hour. I did some work for clients in January but haven't sent the bills out yet. Should I bill the January clients at my old rate of $175 or can I get away with charging the new rate of $225? What's the best way to tell my clients about the rate increase?"

One of the hardest things you will ever do in business is raise your prices. Even big companies are reluctant to do it. Once a customer gets used to paying a certain price for something, it's tough to convince them they should pay more for it because of things beyond their control-an increase in the rate of inflation, an increase in your cost of doing business, or an increase in the rates your competitors charge. Many customers will be upset, especially business customers, because they probably aren't free to raise their rates as freely as you are. Also, many customers will want to know, "What am I getting extra for the additional fee?"

In this case, you're talking about an increase of almost 30 percent, at a time when inflation is only about 3 or 4 percent. You've got an uphill fight ahead of you, and you'll have to deal with your customers very, very carefully. As one of my clients puts it, "I don't want any surprises unless it's a gift."

Let's take the easy question first. Under no circumstances should you bill your customers $225 an hour for work you've already done that they're expecting you to do for $175 an hour. One of the best ways to lose clients in any business is to increase your fees and not tell your customers about it beforehand. It's just bad business and will make you look sleazy. Your January invoices should be for $175 an hour. Whenever you decide to increase your fees, you should tell them about it before you begin billing at the new rate. Period.

As for how you can best notify your customers about your increased hourly rate, I have a two word answer: very carefully. Your communications skills will be tested to the limit here. I would not send your customers a notice with their January invoice. First of all, many customers won't even read it, and then when they receive your February invoice at the higher rate, they'll go through the roof. Second of all, even if they do read it, a written notice is extremely impersonal. No matter how well your draft it, it's going to come across as a "take it or leave it" ultimatum, and your best customers will be offended that you didn't make more of an effort to treat them with respect.

Here's what you should do:

• Make a list of your top 20 customers, call the highest-ranking person you deal with at each business, and inform them verbally of your fee increase. Do not do this by e-mail under any circumstances, although you can follow up your conversation with an e-mail "confirming our telephone discussion earlier today," so that you have something in your records to remind the customer later on.

• In your telephone conversation, be sure to explain the reasons why you're increasing your rates.

• Keep underscoring the fact that your competitors are at least 10 to 25 percent more expensive than you are-I would add an invitation "to call me please if you hear of anyone else offering a better deal, as I would be happy to match their offer for such a good customer." This sends a strong positive signal that you're not totally inflexible and are still willing to offer your best customers the most competitive deal you can.

• Send the rest of your customers an e-mail message (be sure to use the "request confirmation of receipt" feature in your e-mail program) notifying them of the fee increase and explaining your reasons for raising your fees. The e-mail should be as friendly as possible and should close with an invitation to call you if they have any questions or concerns about the increase "as you are an important customer and I value your input."

• If you include your pricing information in your marketing brochures and Web site, be sure these are updated promptly to reflect your higher rates. Nothing turns a new client off like hearing you quote a fee for your services that's higher than the fee they saw quoted on the Internet.

• Consider offering an artificial discount, such as "you should know that I'm raising my standard hourly rate to $275 an hour, but because you're such a good customer and have been with me for a long time, I'd be willing to offer you a reduced rate of $225 an hour." That way, you're still getting the higher rate you want and the customer thinks they're getting a terrific deal. Just make sure the client never finds out that all your clients are paying the same "discounted" rate.

No matter what you do, you'll probably lose a customer or two, as some customers will (irrationally) want to punish you for having the audacity to raise your fees without permission. In so doing, of course, they'll punish themselves, as they'll end up paying more for services than they should, but there's nothing you can do about it.

One more thing: Make sure you raise your fees high enough so you don't have to increase them again for at least another year or two. Frequent fee hikes tell your customers you don't know how to run your business, and they'll lose confidence in your judgment.

Cliff Ennico is host of the PBS TV series MoneyHunt and a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on Small Business Television Network. E-mail him at cennico@legalcareer.com. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2004 Clifford R. Ennico. Distributed by Creators Syndicate Inc.